As the diamond market returns to normal following the post-Christmas lull, attention is turning to the outcome of the holiday season.

December began with US retailers continuing to express a finicky appetite for inventory ahead of the holiday. That apprehension appeared warranted as the outcome of holiday diamond buying was generally lackluster, especially considering the markdowns that many retailers made to encourage purchases.

Thus, the holiday season fell in line with the rest of the year, which was characterized by weakness.

According to the RapNet Index, polished prices closed the year in the red, with 1-carat diamonds being the biggest loser, down over 12.5 percent. 3-carat diamonds were down 11.6 percent, 0.5-carat diamonds were down 11.1 percent and 0.3-carat diamonds declined 7.4 percent for the year.

The rough diamond market remains weak globally and manufacturing in India is still below capacity.

In the polished market, demand remains steady for fancy diamonds, especially smaller sizes. There continues to be a healthy appetite for lower-quality goods, with tight supply being reported for SI and lower-quality diamonds.

China shows signs of economic improvement ahead of Chinese New Year, and that is boosting optimism about demand in that market. Though focus has started to shift to that event, retailers in that market are showing a reluctance to build inventory.

There were concerns that automatic tax increases related to the fiscal cliff could negatively impact diamond demand. Though the US government managed a deal, it still involves tax increases, most notably on higher-income households. Therefore, concerns remain about the impact on luxury spending in 2013.

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Diamonds exhibit low and stable correlations with traditional financial market assets, and lower correlation with precious metals that the metals show with one another. The result is that diamonds can and do offer a superior portfolio diversification when maximizing risk adjusted rate of return is the goal. When you combine lower volatility with low or stable correlations to traditional asset classes, historical strong performance, and excellent upside potential, diamonds in a portfolio makes an excellent choice.

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The long-term outlook for Diamond is positive and the worlds largest Diamond producers are confident that the next few years will see a return to robust demand growth. The main growth markets for the metal are the BRIC countries, but demand from Western economies is expected to rise as well. The automotive and aerospace industries are seen as the main catalysts for new growth as manufacturers seek to reduce fuel consumption by creating lighter weight vehicles.

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